Reverse Mortgage

In this post you will see how might a reverse mortgage help you as a senior citizen to expand your monthly income consistently to carry on with life on your standing.

The government has dispatched this plan for the senior citizens who are over 60 years of age and have a fully owned property in their name however are confronting the money crunch. They can reverse mortgage to earn some additional income consistently.

What is a Reverse Mortgage? How does it work?

How does Reverse Mortgage work?

Assume Amit and Radha are an older couple who has amassed a retirement corpus of Rs 1,50,00,000 alongside a house or flat to live in. 3 years down the lane they believe they can utilize some additional cash in hand each month which will be utilized to cover the medical premiums or casual purchases.

They are bringing an amount of Rs 35,000 every month with Systematic Withdrawal Plan (SWP) which is coming out to be less for their requirements. They moved toward the local public sector bank to reverse mortgage their fully paid home to meet their additional necessities.

(Also Read: Mortgage-backed securities)

Bank agreed on the accompanying conditions:

They can just pay a limit of 1 Crore which can be 60–80% estimation of the house. (Their house is worth 1 Crore precisely at the time henceforth they can get 75 Lakhs endorsed after assessment.)

The tenure of the reverse mortgage will be of 10 to 20 years of period. (They agreed it to be 15 years as the average age of survival in India is 75 years of age.)

Regardless of whether the reverse loan tenure finishes then Amit/Radha doesn't need to pay anything to the bank, simply the monthly payments would stop. They can keep on occupying the property till they are alive. (They can live free regardless of whether they end up being 85 which is 10 years after the period.)

Amit and Radha took a snappy zoom call to advise his son (Rachit) about the choice they are taking:

They are planning to create additional Rs 25,000 through the reverse mortgage scheme for the following 15 years.

Rachit can either decide to get the house or flat back by paying the loan amount adjusted with the basic return imposed by the bank or permit the bank to auction the flat and recover the cost. Any additional cost will be shipped off the legal heir or Rachit in this case.

Payout Option Offered by the Bank

Ordinary Mortgage Loan (The bank will pay you a fixed cost each month and you don't need arrangement with any third party like LIC for explanations.)

Annuity Based Loan (Lumpsum amount is given to an insurance company to ensure future payments based on monthly, quarterly or yearly.) Least Lucrative in light of low interest rates and taxed.

(Also Read: How home loan interest rates are determined in India?)

Is it really conceivable in India?

For example, if a borrower takes a loan for a very long time and winds up living for the following 40 years then the lender or bank can't do anything other than hang tight for the death or demise of the borrower to recover the property.

The property tax, maintenance, or even insurance must be taken care of by the proprietor which implies you will be liable for all the recurring costs instilled in the ownership of the house. You can't sell the house till the time you repay the loan taken or during your lifetime.

Amit and Radha had the option to produce a monthly income of 55,000 since they are 60 years of age and cheerfully carried on with a life of pride for the following 80 years.

After their demise, Rachit chose to release the house as the property is in a crowded area. Which was when sold made him Rs 35 lakhs after taxes which he paid in down payment for his new house worth 1.5 Cr in a less crowded area.